Small balance refers to any real-estate-asset-based investment where the dollar amounts and scale are relatively small. Fitting this description would include freestanding in-bay automatics and mini-tunnels.
Investment may involve direct acquisition of real estate (i.e., purchase a going concern), origination of real estate secured loans (i.e., construction), or acquisition of distressed debt (i.e., bank-owned property).
Small balance property is usually passed over by the big players because the scale and scope of these opportunities are impractical.
Investment opportunities may be found in areas undergoing gentrification, vacant out parcels, underused sites, satellite communities, and semi-rural areas. Properties to avoid are those located in Class C and distressed markets, and remnant land.
Shown in Table 1 are minimum requirements for land and building.
Shown in Table 2 are hourly capacities and typical production possibilities for each small balance project mentioned.
Due to physical constraints that limit hourly capacity, throughput is a critical issue for small balance projects.
Throughput is the rate at which sales are generated less truly variable cost. Labor costs are not considered unless it is 100 percent tied to production.
This would be the case for a mini-tunnel because attendants are required to operate the facility whereas the in-bay platforms are unmanned.
Average direct material cost to clean, shine, and protect is $2.60 per car. Adding in credit card fees ups this to about $3.00.
Consequently, achieving average per-car revenue of $12.00 would provide an attractive margin.
Such an average will require providing value-added products such as lava, rain repellant, hot wax, ceramic, spot-free, and, if possible, tire shine.
The rate at which sales are generated can also be influenced with the marketing program. For example, a monthly wash plan or loyalty program (e.g., VIP, BOGO) will build volumes and help the business stay on par with the competition’s offerings.
In this case, the wash would need to accept mobile payment and be equipped with vehicle identification.
Although free self-serve vacuum is a feature of the express business model and a nice touch, we find vacuums are not absolutely necessarily to wash a lot of cars.
As shown in the photos, there are also a number of approaches that can be taken with respect to building construction.
Construction cost varies from around $150 per square foot for stick-built structures to $200 per square foot for pre-made modular and more for block and mortar.
Suitable property would be in the $15 to $20 per square foot range and of greater dimension than the minimum requirements stated earlier. Site work for a small pad site runs around $100,000.
Equipment cost varies considerably. A single state-of-the-art in-bay with all the options, point-of-sale, and software is around $150,000. An In-bay express is $200,000 or more. Depending on length and configuration of the conveyor, a mini-tunnel will run between $400,000 and $600,000 whereas a wash-bay conversion is about $400,000.
An in-bay automatic will help keep operating cost to a minimum. Principal are expenses for advertising, building maintenance, trash collection, pit cleaning, insurance, and property tax.
As mentioned earlier, a mini-tunnel requires attendants to operate. Providing adequate coverage throughout the week will require about 130 hours of labor.
Another hurdle to overcome is finance. Debt financing for small loan amounts in secondary markets is not a popular target market for most banks. Consequently, lenders will expect to see an excellent market opportunity and management team that has the experience and skill to deliver the business model.
There must also be sufficient collateral to secure the loan amount. Creditworthiness of the borrowers must be demonstrated. Capital to cover operating expenses. And so forth.
Other factors to consider are accelerated depreciation of the equipment and pre-made building and whether to purchase real estate or lease land, building, and equipment.
Another approach to consider is equity financing. Here, the sponsor would sell shares of the company to individual investors with the expectation of getting dividends or gains by selling shares when the value of the company is high. Participation may include a round of family and friends funding, angle investors, or forming a partnership. Of course, the more shares that are sold, the less ownership share is available for the sponsor.